UK government abandons Lloyds Banking Group public share sale plan for now

The government has pulled out of plans to sell shares in Lloyds Banking Group to the public before next year's general election.

George Osborne, the chancellor, had said he wanted the public to be able to be able to buy shares in Lloyds. But the Treasury, which still owns 25% of Lloyds following its £20bn bailout during the 2008 financial crisis, has ruled out a public share sale anytime soon due to stock market volatility.

While the public will have to wait until at least summer 2015 for the chance to buy shares in Lloyds, the Treasury is likely to continue selling chunks of the bank to institutional investors.

Sources in the Treasury said selling shares to the public now would be too risky given market volatility and geopolitical uncertainty. There are also concerned about the 6% drop in Lloyds share price since June.

A spokesman for the Treasury said: "The chancellor set out the government's approach to the state-owned banks in his Mansion House speech last year: we want to maximise support for the British economy, get the best value for money for the taxpayer and return the state-owned banks to private ownership. Any decisions on share sales will be determined by value for money and market conditions."

There are only very brief windows of opportunity to launch the public offer before the election. The sale process could not start before the Scottish independence referendum next month, and would not be permitted in the run up to Lloyds' annual result in February or the Budget in March. By that time it would be just three months until the general election.

Other headaches include uncertainty of Lloyds' hopes to restart dividend payments after six years and the results of Bank of England stress tests.

The government has already sold two chunks of Lloyds shares to institutions – making about £7bn and reducing the taxpayer's stake to 24.9%.

Keith Bowman, an analyst at Hargreaves Lansdown, said: "The timing would be tight for a public offering. But an institutional sale would be a smoother process, with previous sales passing off with few problems."

A public sale of all the remaining government-owned shares, worth £13bn at Wednesday's closing price of 73.7p, would be the biggest privatisation in decades. The flotation of 60% of Royal Mail last October made the government £2bn.

If the shares are sold at yesterday's price the government will just about break even on its investment - having bought up £20bn of Lloyds shares at an average price of 73.6p in 2008 to keep the bank afloat during the crisis.

Last month, Lloyds reported a 33% fall in first-half profits to £863m as its bill for the payment protection insurance (PPI) scandal increased by £600m and it paid out penalties for rigging interest rates.

Lloyds declined to comment on the government's delayed share sale plans, which were first reported by Sky News.